1.	The AMT - what is it, and why should I care?
2.	An Expatriate Example
3.	The Foreign Earned Income Exclusion
4.	Whose brilliant idea was this anyway?

The alternative minimum tax (AMT) is an alternative tax code that is intended to guarantee that people in the high tax brackets pay their fare share of taxes. In a nutshell the, the AMT is computed by taking (at least) 26% of the income above the AMT exemption. If the AMT exceeds the standard tax liability, then that taxpayer is liable for the difference. The computation excludes most tax benefits, including the foreign tax credit. The foreign earned income exclusion, however, is a valid benefit against the AMT.

FYI: The AMT exemption for joint filers is $49,000 for tax years 2001 and 2002. It has been increased to $58,000 for joint filers for tax years 2003 and 2004.

For high-income expatriates, the AMT could leave the family with a tax obligation rather than a nice fat refund. Here is the litmus test: take your earned income less the exemption and multiply the difference by 26%. Now take the number of children under 17 and multiply it by $600 ($1000 for 2003). If the former number is greater, then you lose and the IRS wins.

Take an expatriate example to clarify the issue. The Brady’s are an American family living and working in Italy. They have five children and earned the equivalent of $70,000 in 2002. After taking the standard deduction and exemptions, they are left with a taxable income of $41,150 and a tax of $5,576. Because tax rates are higher in Italy than in the U.S.A., they are entitled to a full foreign tax credit and owe no standard tax. Now the AMT kicks in at 26% of the earnings above the exemption of $49,000, or 0.26 X ($70,000 - $49,000), or $5,460. They are entitled to the child tax credit for $3,000 and are left with a net payable amount of $2,460. See Figure 1 below.

In this situation, the Brady's would be well advised to take the foreign earned income exclusion in order to avoid AMT liability. Granted, this will also disqualify them from the right to claim the child tax credit, and they will not be able to claim a refund.

Basically, the foreign earned income exclusion eliminates the income for tax computation purposes. In the Brady's case, their taxable income would be nil and their tax would be nil, and their refund would be nil.

Keep in mind that the above example assumes that the income was earned by one spouse only. If the income was divided between two spouses, then it might be possible to claim a refund by excluding one income only. Contact me for more details

The Urban Institute set out to answer this question. Here is their answer:

"The practice of requiring well-to-do Americans to pay a minimum tax was developed more than three decades ago. In January 1969, then-Treasury Secretary Joseph W. Barr informed Congress that 155 individual taxpayers with incomes exceeding $200,000 had paid no federal income tax in 1966. The news set off a political firestorm. Members of Congress were deluged with more constituent letters about the untaxed 155 in 1969 than about the Vietnam War. Later that year, Congress created a minimum tax to prevent wealthy individuals from taking undue advantage of tax laws to reduce or eliminate their federal income tax liability."

Unfortunately, what began as a policy to close loopholes for the very wealthy has evolved into an unfair burden to working families.

Read the complete article from the Urban Institute.